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Flashcards in TREPA Deck (104):
1

A company has the following accrual-basis balances at the end of the its first year of operation:

Unearned consulting fees      $2,000

Consulting fees receivable       3,500

Consulting fee revenue         25,000

The company's cash-basis consulting revenue is what amount? 

 $23,500

2

According to the FASB Conceptual Framework, which of the following relates to both relevance and faithful representation?

a. Consistency and Verifiability

b. Consistency

c. Neither

d. Verifiability

Consistency and Verifiability

3

According to the FASB conceptual framework, the objectives of financial reporting for business enterprises are based on 

The needs of the users of the information. 

4

Which of the following characteristics relates to both accounting relevance and faithful representation?

a. Free from error.

b. Neutrality.

c. Predictive value.

d. Comparability. 

Comparability. 

5

Esker Inc. specializes in real estate transactions other than retail land sales. On January I, year I, Esker consummated a sale of property to Kame Ltd. The amount of profit on the sale is determinable and Esker is not obligated to perform any additional activities to earn the profit. Kama's initial and continuing investments were adequate to demonstrate a commitment to pay for the property. However, Esker's receivable may be subject to future subordination. Esker should account for the sale using the

Cost recovery method. 

6

According to the FASB conceptual framework, the quality of information that helps users increase the likelihood of correctly forecasting the outcome of past or present events is called 

Predictive value.

7

Lane Co., which began operations on January I, year I, appropriately uses the installment method of accounting. The following information pertains to Lane's operations for the year, year I:

Installment sales                                   $1,000,000 

Regular sales                                            600,000 

Cost of installment sales                           500,000 

Cost of regular sales                                 300,000 

General and administrative expenses       100,000

Collections on installment sales               200,000  

The deferred gross profit account in Lane's December 31, year I balance sheet should be 

$400,000 

8

Which of the following assumptions means that money is the common denominator of economic activity and provides an appropriate basis for accounting measurement and analysis? 

Monetary unit. 

9

According to the FASB conceptual framework, certain assets are reported in financial statements at the amount of cash or its equivalent that would have to be paid if the same or equivalent assets were acquired currently. What is the name of the reporting concept? 

 Replacement cost. 

10

On October I, year I, Price Corp., a real estate developer, sold land to Greene Co. for Greene paid $600,000 cash and signed a 10-year $4,400,000 note bearing interest at 12%. The carrying amount of the land was $4,000,000 on date of sale. The note was payable in forty quarterly principal installments of $110,000 beginning January 2, year I. Price appropriately accounts for the sale under the cost recovery method. On January 2, year 2, Greene paid the first principal installment of $110,000 and interest of $132,000. For the year ended December 31, year I, what total amount of income should Price recognize from the land sale and financing?

$0

11

Seldin Co. owns a royalty interest in an oil well. The contract stipulates that Seldin will receive royalty payments semiannually on January 31 and July 31. The January 31 payment will be 20% for of the oil sold to jobbers between the previous June I and November 30, and the July 31 payment will be for oil sold between the previous December I and May 31. Royalty receipts for year 3 amounted to $80,000 and $100,000 on January 31 and July 31, respectively. On December 31, year 2, accrued royalty revenue receivable amounted to $15,000. Production reports show the following oil sales:

June I, year 2 - November 30, year 2          $400,000 

December I, year 2 - May 31, year 3               500,000

June I, year 3 -  November 30, year 3             425,000

December I, year 3 - December 31, year 3        70,000

What amount should Seldin report as royalty revenue for year 3? 

 $184,000 

12

According to the cost recovery method of accounting, gross profit on an installment sale is recognized in income

After cash collections equal to the cost of sales have been received. l

13

In November and December year I, Dorr Co., a newly organized magazine publisher, received $72,000 for 1,000 3-year subscriptions at $24 per year, starting with the January year 2 issue. Dorr elected to include the entire $72,000 in its year I income tax return. What amount should Dorr report in its year I income statement for subscriptions revenue? 

$0

14

Recognizing depletion expense is an example of the accounting process of 

a. Neither

b. Amortization

c. Allocation and Amortization

d. Allocation

Allocation and Amortization

15

Wright Company sells for cash major household appliance service contracts agreeing to service customers' appliances for a I -year, 2-year, or 3-year period. Cash receipts from contracts are credited to unearned service contract revenues and this account had a balance of $1,440,000 at December 31, year I, before year-end adjustment. Service contract costs are charged to service contract expense as incurred and this account had a balance of $360,000 at December 31, year I. Outstanding service contracts at December 31, year I, expire as follows:

During year 2    $300,000

During year 3      450,000

During year 4      200,000

What amount should Wright report as unearned service contract revenues at December 31, year I?

$950,000

16

On January 3, year I, Paterson Services, Inc. signed an agreement authorizing Cobb Company to operate as a franchisee over a 20-year period for an initial franchise fee of $50,000 received when the agreement was signed. Cobb commenced operations on July I, year I, at which date all of the initial services required of Paterson had been performed. The agreement also provides that Cobb must pay a continuing franchise fee equal to 5% of the revenue from the franchise annually to Paterson. Cobb's franchise revenue for year I was $400,000. For the year ended December 31, year I, how much should Paterson record as revenue from franchise fees in respect of the Cobb franchise?

$70,000 

17

Wind Co. incurred organization costs of $6,000 at the beginning of its first year of operations. How should Wind treat the organization costs in its financial statements in accordance with GAAP? 

Expensed immediately 

18

Under Statement of Financial Accounting Concepts 8, which of the following relates to both relevance and faithful representation?

a. Predictive value.

b. Completeness.

c. Neutrality.

d. Timeliness.

Timeliness.

19

Which of the following statements best describes an operating procedure for issuing new Financial Accounting Standards Board (FASB) statement?

A new statement is issued only after a majority vote by the members of the FASB. 

20

Rent revenue collected I month in advance should be accounted for as

A current liability. 

21

Which of the following should be expensed as incurred by franchise with an estimated useful life of 10 years?

a. Periodic payments to the franchisor based on the franchisee's revenues.

b. Amount paid to the franchisor for the franchise.

c. Legal fees paid to the franchisee's lawyers to obtain the franchise.

d. Periodic payments to company, other than the franchisor, for that company's franchise. 

Periodic payments to the franchisor based on the franchisee's revenues. 

22

Sanni Co. had $150,000 in cash-basis pretax income for the year. At the current year-end, accounts receivable decreased by $20,000 and accounts payable increased by $16,000 from their previous year-end balances. Compared to the accrual-basis method of accounting, Sanni's cash-basis pretax income is

Higher by $36,000

23

Which of the following is true regarding the comparison of managerial to financial accounting?

a. Managerial accounting has a past focus and financial accounting has a future focus.

b. The emphasis on managerial accounting is relevance and the emphasis on financial accounting is timeliness.

c. Managerial accounting is generally more precise.

d. Managerial accounting need not follow generally accepted accounting principles (GAAP) while financial accounting must follow them. 

Managerial accounting need not follow generally accepted accounting principles (GAAP) while financial accounting must follow them. 

24

On December 31, year I, Moon, Inc. authorized Luna Co. to operate as a franchisee for an initial franchise fee of $100,000. Luna paid $40,000 on signing the agreement and signed an interest-free note to pay the balance in three annual installments of $20,000 each, beginning December 31, year 2. On December 31, year I, the present value of the note, appropriately discounted, is $48,000. Services for the initial fee will be performed in year 2. In its December 31, year I balance sheet, what amount should Moon report as unearned franchise fees?

$88,000

25

North Co. entered into a franchise agreement with South Co. for an initial fee of $50,000. North received $10,000 at the agreement's signing. The remaining balance was to be paid at a rate of $10,000 per year, beginning the following year. North's services per the agreement were not complete in the current year. Operating activities will commence next year. What amount should North report as franchise revenue in the current year? 

$0

26

Entor Co. sold equipment to Pane Co. for $50,000. The equipment had a net book amount of $30,000. The collections were $20,000 in the first year, $15,000 in the next year, and $15,000 in the last year. What is the amount of gross profit for the third year if Entor used the installment-sales accounting method for the transaction? 

$6,000 

27

Before year 2, Droit Co. used the cash basis of accounting. As of December 31, year 2, Droit changed to the accrual basis. Droit cannot determine the beginning balance of supplies inventory. What is the effect of Droit's inability to determine beginning supplies inventory on its year 2 accrual basis net income and December 31, year 2 accrual-basis owners' equity?

   Year 2 net income   12/31/Y2 Owners' equity

a. No effect                  No effect

b. No effect                  Overstated 

c. Overstated                No effect

d. Overstated               Overstated 

Overstated                No effect

28

Marr Corp reported rental revenue of $2,210,000 in its cash basis federal income tax return for the year ended November 30, year 2 Additional information is as follows

Rents receivable - November 30, year 2               $1,060,000

Rents receivable - November 30, year 1                     800,000

Uncollectible rents written off during the fiscal year      30,000 

Under the accrual basis, Marr should report rental revenue of 

$2,500,000

29

A company received royalties from the assignment of patents to other enterprises. In the period in which the royalties are earned, the royalties should be

Reported as revenue. 

30

Weaver Company sells magazine subscriptions for a 1-year, 2-year, or 3-year period. Cash receipts from subscribers are credited to magazine subscriptions collected in advance, and this account had a balance of $1,700,000 at December 31, year 1. Information for the year ended December 31, year 2, is as follows

Cash receipts from subscribers                                    $2,100,000

Magazine subscriptions revenue (credited at 12/31N2)    1,500,000

In its December 31 year 2 balance sheet, what amount should Weaver report as the balance for magazine subscriptions collected in advance? 

$2,300,000

31

Asp Co. appropriately uses the installment method of revenue recognition to account for its credit sales. The following information was abstracted from Asp's December 31, year 2, financial statements:

                                            Year 2                 Year I 

Sales                                    $1,500,000         $1,000,000

Accounts receivable: 

Year 2 sales                             900,000               

Year I sales                               540,000              600,000

Deferred gross profit:

Year 2 sales                              252,000

Year I sales                                 108,000              120,000 

What was Asp's gross profit pecentage for year 2 sales?

28%

32

Cash collection is critical event for income recognition in the

a. Neither

b. Cost-recovery method and Installment method

c. Installment method

d. Cost-recovery method

. Cost-recovery method and Installment method

33

According to the FASB's conceptual framework, comprehensive income includes which of the following?

a. Operating income

b. Operating income and Investments by owners 

c. Investments by owners

d. Neither

 Operating income

34

Under what condition is it proper to recognize revenues prior to the sale of the merchandise? 

When the ultimate sale of the goods is at an assured sales price. 

35

On December 31, year I, Reed, Inc. authorized Foy to operate as a franchisee for an initial franchise fee of $75,000. Of this amount, $30,000 was received upon signing the agreement and the balance, represented by a note, is due in three annual payments of $15,000 each beginning December 31, year 2. The present value on December 31, year I, of the three annual payments appropriately discounted is $36,000. According to the agreement, the nonrefundable down payment represents a fair measure of the services already performed by Reed; however, substantial future services are required of Reed. Collectibility of the note is reasonably certain. On December 31, year I, Reed should record unearned franchise fees in respect of the Foy franchise of 

 $36,000 

36

Magazine subscriptions collected in advance are reported as

 Deferred revenue in the liability section of the balance sheet. 

37

On November I, year 2, Key Co. paid $3,600 to renew its insurance policy for 3 years and used an income statement account to record this transaction. At December 31, year 2, Key's unadjusted trial balance showed a balance of $90 for prepaid insurance and $4,410 for insurance expense. What amounts should be reported for prepaid insurance and insurance expense in Key's December 31, year 2 financial statements?

   Prepaid insurance     Insurance expense

a. $3,300                     $1,200

b. $3,400                     $1,200

c. $3,400                      $1,100 

d. $3,490                      $1,010

$3,400                      $1,100 

38

When company estimates its bad debt expense using the percent of net credit sales method, which of the following statements is true?

a. Substance over form is being followed.

b. Going concern is not being followed.

c. Matching is being followed.

d. Matching is not being followed. 

Matching is being followed. 

39

Under Statements of Financial Accounting Concepts, comprehensive income includes which of the following? 

a. Neither

b. Gross margin

c. Gains

d. Gains and Gross margin

Gains and Gross margin

40

On January 2, year I, Smith purchased the net assets of Jones' Cleaning, a sole proprietorship, for $350,000, and commenced operations of Spiffy Cleaning, sole proprietorship. The assets had a carrying amount of $375,000 and a market value of $360,000. In Spiffy's cash-basis financial statements for the year ended December 31, year I, Spiffy reported revenues in excess of expenses of $60,000. Smith's drawings during year I were $20,000. In Spiffy's financial statements, what amount should be reported as Capital-Smith?

$390,000 

41

The following information is available for Bart Company for year I:

Disbursements for purchases               $580,000 

Increase in trade accounts payable           50,000

Decrease in merchandise inventory          20,000 

Cost of goods sold for year I was

$650,000 

42

To be relevant, information should have which of the following? 

Confirmatory value. 

43

James Lee, M.D. keeps his accounting records on a cash basis During year 2, D. Lee collected $100,000 in fees from his patients. At December 31, year 1, Dr. Lee had accounts receivable of $20,000.  At December 31, year 2, Dr Lee had accounts receivable of $30,000, and unearned fees of $1,000. On an accrual basis, how much was Dr Lee's patient service revenue for year 2?

$109,000

44

Under Statement of Financial Accounting Concepts 8, predictive value is an ingredient of the fundamental quality of 

Relevance. 

45

Which of the following is an example of the expense recognition principle of associating cause and effect?

a. Depreciation of fixed assets.

b. Officers' salaries.

c. Sales commissions.

d. Allocation of insurance cost.

Sales commissions. 

46

The premium on a 3-year insurance policy expiring on December 31, year 3, was paid in total on January I, year I. Assuming that the original payment was initially debited to an expense account, and that appropriate adjusting entries have been recorded on December 31, year I and year 2, the balance in the prepaid asset account on December 31, year 2, would be 

The same as it would have been if the original payment had been initially debited to prepaid asset account. 

47

Adam Co reported sales revenue of $2,300,000 in its income statement for the year ended December 31, year 2 Additional information was as follows

                                                             12/31/Y1       12/31/Y2

Accounts receivable                              $500,000   $650,000

alIowance for uncollectible accounts     (30,000)         (55,000)

Uncollectible accounts totaling $10,000 were written off during year 2. Under the cash basis of accounting, Adam would have reported year 2 sales of 

$2,140,000

48

Kelly Corp. barters with Ace Corporation for goods that are similar in nature and value. The value of the goods was $1,000. The cost of the goods was $400. If Kelly uses IFRS to prepare financial statements, what amount should Kelly recognize as income?

$0

49

Gemini prepares its financial statements using International Financial Reporting Standards (IFRS). If Gemini cannot reliably estimate the income and expenses of customer contracts, what accounting method should be used to recognize revenues? 

Cost recovery method. 

50

Deb Co. records all sales using the installment method of accounting. Installment sales contracts call for 36 equal monthly cash payments. According to the FASB's conceptual framework, the amount of deferred gross profit relating to collections 12 months beyond the balance sheet date should be reported in the 

 Current asset section as contra account.

51

Which of the following organizations is responsible for setting International Financial Reporting Standards?

a. Financial Accounting Committee.

b. International Accounting Standards Board.

c. International Accounting Standards Committee.

d. Financial Accounting Standards Board.

International Accounting Standards Board. 

52

According to the FASB conceptual framework, earnings

Exclude certain gains and losses that are included in comprehensive income. 

53

According to the IASB Framework, the financial statement element that is defined as decreases in economic benefits during the accounting period in the form of outflows or depletions of assets or incurrence of liabilities that result in decreases in equity, other than those relating to distributions to equity participants, is 

Expense.

54

During year 3, Fleet Co.'s trademark was licensed to Hitch Corp. for royalties of 10% of net sales of the trademarked items. Returns were estimated to be 1% of gross sales. On signing the licensing agreement, Hitch paid Fleet $75,000 as an advance against future royalty earnings. Gross sales of the trademarked items during the year were $600,000. What amount should Fleet report as royalty income for year 3?

 $59,400 

55

Dee's inventory and accounts payable balances at December 31, year 2, increased over their December 31, year I, balances. Should these increases be added to or deducted from cash payments to suppliers to arrive at year 2 cost of goods sold? 

   Increase in inventory   Increase in accounts payable

a. Added to                     Deducted from

b. Added to                     Added to

c. Deducted from            Deducted from

d. Deducted from            Added to

 Deducted from            Added to

56

The premium on a 3-year insurance policy expiring on December 31, year 3, was paid in total on January I, year I. Assuming that the original payment was recorded as a prepaid asset, how would total assets and stockholders' equity be affected during year 3?

Both total assets and stockholders' equity would decrease.

57

A company provides the following information: 

                                                      Year I         Year 2       Year 3

Cash receipts from customers:           

From year I sales                           $95,000     $120,000               

From year 2 sales                                             200,000    $75,000

From year 3 sales                                               50,000     225,000

What is the accrual-based revenue for year 2? 

$275,000 

58

According to the IASB Framework, the financial statement element that is defined as increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions from equity participants, is 

Income.

59

Which of the following is deferred cost that should be amortized over the periods estimated to be benefited?

a. Property tax for this year payable next year.

b.  Advance from customer to be returned when sale completed.

c. Security deposit representing 2-months' rent on leased office space.

d.  Prepayment of 3-year insurance premiums on machinery.

Prepayment of 3-year insurance premiums on machinery.

60

Taft Corp., which began January 1, year 1, appropriately uses the installment sales method of accounting. The following data are available for December 31, year I and year 2.

Balance of deferred

gross profit on

sales account              Year I            Year 2 

Year I                          $300,000      $120,000

Year 2                                                 440,000

Gross profit on sales   30%                  40%

The installment accounts receivable balance at December 31, year 2, is

$1,500,000

61

Under Statement of Financial Accounting Concepts 8, completeness is an ingredient of

a. Relevance and Faithful representation

b. Relevance

c. Neither

d. Faithful representation

 

Faithful representation

62

At December 31, year 2, Cobb Company had $695,000 balance in its advertising expense account before any yearend adjustments relating to the following.

Included in the $695,000 is $80,000 for printing sales catalogs for January year 3 sales promotional campaign.

Television advertising spots telecast during December year 2 were billed to Cobb on January 2, year 3. The invoice cost of $45,000 was paid on January 11, year 3.

Cobb's advertising expense for the year ended December 31, year 2, should be

$660,000

63

Historical cost is measurement base currently used in financial accounting. Which of the following measurement bases is(are) also currently used in financial accounting?

a. Current market value and Replacement cost 

b. Current market value, Discounted cash flow, and Replacement cost

c. Current market value

d. Discounted cash flow and Replacement cost

Current market value, Discounted cash flow, and Replacement cost

64

According to the FASB Conceptual Framework, which of the following situations violates the concept of faithful representation?

a. Management reports to stockholders regularly refer to new projects undertaken, but the financial statements never report project results.

b. Financial statements included property with a carrying amount increased to management's estimate of market value.

c. Financial statements were issued 9 months late.

d. Report data on segments having the same expected risks and growth rates to analysts estimating future profits.

 Financial statements included property with a carrying amount increased to management's estimate of market value. 

65

On December 30, Devlin Co. sold goods to Jensen Co. for $10,000, under an arrangement in Which (I) Jensen has an unlimited right of return and (2) Jensen's obligation to pay Devlin is contingent upon Jensen's reselling the goods. Past experience has shown that Jensen ordinarily resells 60% of goods and returns the other 40%. What amount should Devlin include in sales revenue for this transaction on its December 31 income statement? 

$0

66

Under FASB Statement of Financial Accounting Concepts 5, comprehensive income excludes changes in equity resulting from which of the following? 

Purchases of treasury stock. 

67

Under Statement of Financial Accounting Concepts 6, the term "recognized" is synonymous with the term 

 Recorded.

68

Which of the following is an accrued liability?

a. Cash dividends payable.

b. Rent revenue collected I month in advance.

c. Portion of long-term debt payable in current year.

d. Wages payable. 

 Wages payable. 

69

Young & Jamison's modified cash-basis financial statements indicate cash paid for operating expenses of $150,000, end-of-year prepaid expenses of $15,000, and accrued liabilities of $25,000. At the beginning of the year, Young & Jamison had prepaid expenses of $10,000, While accrued liabilities were $5,000. If cash paid for operating expenses is converted to accrual-basis operating expenses, what would be the amount of operating expenses? 

$165,000

70

The FASB's conceptual framework classifies gains and losses based on whether they are related to an entity's major ongoing or central operations. These gains or losses may be classified as

a. Nonoperating

b. Nonoperating and Operating

c. Operating

d. Neither

Nonoperating and Operating

71

Which of the following is an application of the principle of systematic and rational allocation?

Amortization of intangible assets. 

72

A retail store received cash and issued gift certificates that are redeemable in merchandise. The gift certificates lapse I year after they are issued. How would the deferred revenue account be affected by each of the following transactions? 

   Redemption of certificates   Lapse of certificates

a. No effect                              Decrease

b. Decrease                             Decrease

c. Decrease                             No effect

d. No effect                             No effect

Decrease                             Decrease

73

According to the FASB Conceptual Framework, predictive value is an ingredient of 

a. Neither

b. Relevance and Faithful representation

c. Faithful representation

d. Relevance

Relevance

74

The following information pertains to sale of real estate by Ryan Co. to Sud Co. on December 31, year I:

Carrying amount                                      $2,000,000

Salas price:

Cash                                    $ 300,000 

Purchase money mortgage  2,700,000    $3,000,000

The mortgage is payable in nine annual installments of $300,000 beginning December 31, year 2, plus interest of 10%. The December 31, year 2 installment was paid as scheduled, together with interest of $270,000. Ryan uses the cost recovery method to account for the sale. What amount of income should Ryan recognize in year 2 from the real estate sale and its financing?

$0

75

On January I, year I, Brecon Co. installed cabinets to display its merchandise in customers' stores. Brecon expects to use these cabinets for 5 years. Brecon's year I multi-step income statement should include

 One-fifth of the cabinet costs in selling, general, and administrative expenses. 

76

An accrued expense is an expense

Incurred but not paid. 

77

According to the FASB Framework for the Preparation and Presentation of Financial Statements, the qualitative characteristic of relevance includes

 Predictive value, confirmatory value, and materiality. 

78

Baker Co. has a franchise restaurant business. On January  15 of the current year, Baker charged an investor a franchise fee of $65,000 for the right to operate as franchisee of one of Baker's restaurants. A cash payment of $25,000 towards the fee was required to be paid to Baker during the current year. Four subsequent annual payments of $10,000 with a present value of $34,000 at the current market interest rate represent the balance of the fee which is expected to be collected in full. The initial cash payment is nonrefundable and no future services are required by Baker. What amount should Baker report as franchise revenue during the current year?

 $59,000 

79

How would the proceeds received from the advance sale of nonrefundable tickets for theatrical performance be reported in the seller's financial statements before the performance?

Unearned revenue for the entire proceeds.

80

Decker Company assigns some of its patents to other enterprises under a variety of licensing agreements. In some instances advance royalties are received when the agreements are signed, and in others, royalties are remitted within 60 days after each license year-end. The following data are included in Decker's December 31 balance sheet:

                                     Year I          Year 2

Royalties receivable      $90,000     $85,000

Unearned royalties          60,000       40,000

During year 2 Decker received royalty remittances of $200,000.  In its income statement for the year ended December 31, year 2, Decker should report royalty revenue of

$215,000

81

Under Gerber Company's accounting system, all insurance premiums paid are debited to prepaid insurance.  For interim financial statements, Gerber makes monthly estimated charges to insurance expense with an offset to prepaid insurance.  Additional information for the year ended December 31 year 2, is as follows

Prepaid insurance at December 31, year 1      $150,000

Charges to insurance expense during

year 2 (including a year-end adjustment

of $25,000)                                                      625,000

Unexpired insurance premiums at

December 31, year 2                                          175,000

What was the total amount of insurance premiums paid by Gerber during year 2? 

$650,000

82

Winn Co. sells subscriptions to a specialized directory that is published semiannually and shipped to subscribers on April 15 and October 15. Subscriptions received after the March 31 and September 30 cutoff dates are held for the next publication. Cash from subscribers is received evenly during the year and is credited to deferred subscription revenue. Data relating to year 2 are as follows:

Deferred subscription revenue, 1/1/Y2     $ 750,000

Cash receipts from subscribers                3,600,000

In its December 31, year 2 balance sheet, Winn should report deferred subscription revenue of

$900,000

83

Lane Company acquires copyrights from authors, paying advance royalties in some cases, and in others, paying royalties within 30 days of year end.  Lane reported royalty expense of $375,000 for the year ended December 31, year 3. The following data are included in Lane's December 31 balance sheets:

                                Year 2        Year 3

Prepaid royalties      $60,000     $50,000

Royalties payable        75,000       90,000

During year 3 Lane made royalty payments totaling 

$350,000

84

Savor Co. had $100,000 in cash-basis pretax income for year 2. At December 31, year 2, accounts receivable had increased by $10,000 and accounts payable had decreased by $6,000 from their December 31, year 2 balances. Compared to the accrual basis method of accounting, Savor's cash pretax income is

Lower by $16,000 

85

Macklin Co. entered into a franchise agreement with Heath Co. for an initial fee of $50,000. Macklin received $10,000 when the agreement was signed. Heath signed an interest bearing-note for $40,000. The note was to be paid at a rate of $10,000 per year, starting the next year. All services were performed by Macklin and the refund period had expired. Operations started in the current year. What amount should Macklin recognize as revenue in the current year?

$50,000

86

According to the FASB Conceptual Framework, what does the concept of faithful representation in financial reporting include? 

Neutrality.

87

Ott Company acquired rights to a patent from Grey under a licensing agreement that required an advance royalty payment when the agreement was signed. Ott remits royalties earned and due under the agreement on October 31 each year. Additionally, on the same date, Ott pays, in advance, estimated royalties for the next year. Ott adjusts prepaid royalties at year-end. Information for the year ended December 31, year 2, is as follows:

Date                                                           Amount  

01/01/Y2   Prepaid royalties                          $ 65,000

10/31/Y2   Royalty payment (charged to

                 royalty expense)                             110,000

12/31/Y2   Year-end credit adjustment to

                royalty expense                                 25,000

In its December 31, year 2 balance sheet, Ott should report prepaid royalties of   

$90,000

88

For financial statement purposes, the installment method of accounting may be used if the 

Ultimate amount collectible is indeterminate. 

89

Bucca Warehousing Corporation bought a building at auction on June 30, year I, for $1,000,000. On July 2, year I, before occupying the building, Bucca sold it to a triple-A rated company for $1,200,000. Bucca received a cash down payment of $300,000 and a first mortgage note at the market rate of interest, for the balance. No additional payments were required until year 2. On September I, year I, an independent appraiser valued the property at $1,500,000.  On its year I income tax return, Bucca reported the sale on the installment basis. How much gain should Bucca recognize in its income statement for the year ended December 31, year I?

$200,000 

90

Tillery Company, which began business on January I, year I, appropriately uses the installment sales method of accounting. The following data are available for year

Installment accounts receivable, December 31, year I  $200,000

Deferred gross profit, December 31, year I (before

recognition of realized gross profit)                               $140,000

Gross profit on sales                                                      40%

The cash collections and the realized gaross profit on installment sales for the year ended December 31, year I, should be

   Cash collections   Realized gross profit

a. $100,000             $80,000

b. $100,000             $60,000

c. $150,000             $80,000

d. $150,000             $60,000 

 $150,000             $60,000 

91

A patent, purchased in year I and being amortized over 10-year life, was determined to be worthless in year 5. The write-off of the asset in year 5 is an example of which of the following principles?

 Immediate recognition. 

92

According to the FASB Conceptual Framework, which of the following correctly pairs fundamental characteristic of accounting information with one of its components?

a. Faithful representation and confirmatory value.

b. Relevance and verifiability.

c. Relevance and predictive value.

d. Faithful representation and timeliness.

Relevance and predictive value. 

93

According to the IASB Framework for the Preparation and Presentation of Financial Statements, the qualitative characteristic of faithful representation includes 

Neutrality, completeness and free from error.

94

Drew Co. produces expensive equipment for sale on installment contracts. When there is doubt about eventual collectibility, the income recognition method least likely to overstate income is

The cost recovery method. 

95

Which of the following accounting panouncements is the most authoritative?

a. The FASB Accounting Standards Codification.

b. FASB Statement of Financial Accounting Concepts.

c. FASB Technical Bulletin.

d.  AICPA Statement of Position. 

The FASB Accounting Standards Codification. 

96

Which of the following is allowable for financial reporting under IFRS?

a. Lower of cost or net realizable value.

b. LIFO

c. Extraordinary items

c. Completed contract method 

Lower of cost or net realizable value. 

97

The accrued balance in revenue account represents an amount that is

a. Earned and Collected

b. Earned

c. Collected

d. Neither

 Earned

98

On January 1, year 2, Batell Company sold its idle plant facility to Cooper, Inc for $1,050,000. On this date the plant had a net book value of $735,001. Cooper paid $150,000 cash on January 1, year 2, and signed a $900,000 note bearing interest at 10% The note was payable in three annual installments of $390,000 beginning January 1, year 3 This included interest of $90,000 Batell appropriately accounted for the sale under the installment method. Cooper made a timely payment of the first installment on January 1, year 3. At December 31, year 3, Batell has deferred gross profit of 

$180,000 

99

According to the IASB Framework, the criteria required for incorporating items into the income statement or statement of financial position are that 

It meets the definition of an element and can be measured reliably.

100

The information provided by financial reporting pertains to 

Individual business enterprises, rather than to industries or an economy as a whole or to members of society as consumers.

101

When would company use the installment sales method of revenue recognition?

When installment sales are material, and there is no reasonable basis for estimating collectability.

102

Under Statement of Financial Accounting Concepts 8, which of the following does not interact with both relevance and faithful representation to contribute to the usefulness of information?

a. Comparability.

b. Neutrality.

c. Timeliness.

d. Understandability.

Neutrality. 

103

UVW Broadcast Co. entered into a contract to exchange unsold advertising time for travel and lodging services with Hotel Co. As of June 30, advertising commercials of $10,000 were used. However, travel and lodging services were not provided. How should UVW account for advertising in its June 30 financial statements? 

An asset and revenue for $10,000 is recognized. 

104

Lang Co. uses the installment method of revenue recognition. The following data pertain to Lang's installment sales for the years ended December 31, year I and year 2:

                                                            Year I             Year 2

Installment receivables at year-end

on year I sales                                      $60,000        $30,000

Installment receivables at year-end

on year 2 sales                                                             69,000

Installment sales                                   80,000             90,000

Cost of sales                                         40,000             60,000

What amount should Lang report as deferred gross profit in its December 31, year 2 balance sheet? 

$38,000